Healthcare investors looking for long-term growth don’t always have to choose between fast-growing companies and defensive businesses. Sometimes the more interesting decision is between two high-quality companies that are growing for entirely different reasons. Johnson & Johnson (NYSE:JNJ) continues to benefit from the breadth of its pharmaceutical and medical technology businesses, while Thermo Fisher’s (NYSE:TMO) outlook increasingly depends on a recovery in life sciences spending after several difficult years.
Both companies reported encouraging results, but does steady diversification or an improving industry cycle offer the stronger long-term opportunity for investors? Let’s take a look.
Bull Case
Johnson & Johnson’s (NYSE:JNJ) pharmaceutical business was arguably the biggest contributor to its strong quarter, as it helped increase total sales, generating $16.38 billion in quarterly sales and exceeding analysts’ estimate of $16.1 billion. The healthcare giant now expects its annual sales to be around $101.1 billion at the midpoint, compared with $100.8 billion previously. In another optimistic feat, it raised its adjusted earnings per share forecast to $11.68 at the midpoint, from a previous $11.55 per share.
The most impressive aspect for Johnson & Johnson (NYSE:JNJ), however, wasn’t simply pharmaceutical growth but rather the company’s ability to offset one of the largest patent cliffs in its portfolio, as it absorbed a significant patent-related decline in Stelara sales while still raising its full-year outlook. Revenue from Johnson & Johnson’s (NYSE:JNJ) Stelara, which treats psoriasis, Crohn’s disease, and other autoimmune conditions, dropped over 55% in the quarter to $740 million due to patent loss.
However, the company’s cancer and newer immunology drugs can be seen countering this loss, as sales of Tremfya, its psoriasis and inflammatory bowel disease drug, rose 72.5% to $2 billion, considerably exceeding the estimate of $1.74 billion. Strong performance from newer drugs such as Tremfya suggests the company’s pipeline is successfully offsetting losses from older products.
While Johnson & Johnson’s (NYSE:JNJ) growth is being driven by the depth of its product portfolio, Thermo Fisher’s (NYSE:TMO) investment case increasingly depends on improving conditions across the broader life sciences industry. Perhaps the biggest positive from the quarter was the recovery in Analytical Instruments, a business that had faced weak demand for nearly two years as biotechnology funding slowed. Its return to growth provides another indication that laboratory spending is beginning to normalize. While one quarter does not establish a trend, sustained improvement in this segment would strengthen the case that the industry’s post-pandemic downturn is easing.
Thermo Fisher’s (NYSE:TMO) Life Sciences Solutions segment further reinforced the recovery narrative. Reported revenue climbed 13% year over year, while organic revenue rose 3%, led by continued strength in the high-margin bioproduction business. Healthy demand in this segment is particularly encouraging because it reflects ongoing investments and supports management’s view that end-market conditions continue to improve.
Bear Case
Johnson & Johnson’s (NYSE:JNJ) MedTech segment was comparatively less impressive during the quarter, with sales slightly missing expectations. Management attributed some of the weakness to temporary headwinds, including inventory-related pressures in China that weighed on Electrophysiology sales and softer U.S. procedure trends affecting Abiomed.
While Johnson & Johnson (NYSE:JNJ) expects these challenges to improve over time, investors may want to watch whether its MedTech business returns to its historical growth trajectory in the coming quarters. If those headwinds persist for longer than management expects, investors may begin questioning whether pharmaceutical growth alone can continue driving the company’s broader earnings expansion.
In Thermo Fisher’s (NYSE:TMO) case, the biggest risk is that investors extrapolate one strong quarter into a full industry recovery. Organic revenue increased 5%, representing meaningful progress but still remaining below the double-digit growth rates the company previously achieved. As a result, expectations for a rapid return to historic growth may prove optimistic. The company’s recovery also remains heavily dependent on pharmaceutical and biotechnology spending. If customers once again delay capital investment, today’s improving demand environment could prove less durable than the market currently expects.
Thermo Fisher’s (NYSE:TMO) latest guidance increase also raises the bar for future execution. With improving organic growth now reflected in investor expectations, the company may need to demonstrate that the recovery in customer spending is sustainable rather than temporary.
Which Growth Story Looks More Durable?
Johnson & Johnson (NYSE:JNJ) and Thermo Fisher (NYSE:TMO) represent two distinct paths to long-term growth. Johnson & Johnson (NYSE:JNJ) relies on the breadth of its portfolio, with pharmaceuticals, MedTech, and a deep pipeline helping offset individual product headwinds. Thermo Fisher (NYSE:TMO), by contrast, is more closely tied to improving customer spending across the life sciences industry. If that recovery continues, Thermo Fisher (NYSE:TMO) may have greater cyclical upside. However, Johnson & Johnson’s (NYSE:JNJ) diversified business model arguably provides greater resilience if industry conditions weaken again.
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Disclosure: None. This article is originally published at Insider Monkey.
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